Kesterman Corporation is in the process of negotiating a loan for expansion purposes. Kesterman's books and records have never been audited and the bank has requested that an audit be performed and that IFRS be followed. Kesterman has prepared the following comparative financial statements for the years ended December 31, 2014 and 2013.

During the audit, the following additional facts were determined:
1. An analysis of collections and losses on accounts receivable during the past two years indicates a drop in anticipated bad debt losses. After consulting with management, it was agreed that the loss experience rate on sales should be reduced from the recorded 2% to 1.5%, beginning with the year ended December 31, 2014.
2. An analysis of the fair value-net income investments revealed that the total fair value for these investments as at the end of each year was as follows:
Dec. 31, 2013 ........................... $78,000
Dec. 31, 2014 ........................... $65,000
3. Inventory at December 31, 2013, was overstated by $8,900 and inventory at December 31, 2014, was overstated by $13,600.
4. On January 2, 2013, equipment costing $30,000 (estimated useful life of 10 years and residual value of $5,000) was incorrectly charged to operating expenses. Kesterman records depreciation on the straight-line basis. In 2014, fully depreciated equipment (with no residual value) that originally cost $17,500 was sold as scrap for $2,800. Kesterman credited the $2,800 in proceeds to the equipment account.
5. An analysis of 2013 operating expenses revealed that Kesterman charged to expense a four-year insurance premium of $4,700 on January 15, 2013.
6. The analysis of operating expenses also revealed that operating expenses were incorrectly classified as part of administrative expenses in the amount of $15,000 in 2013 and $35,000 in 2014.
Instructions
(a) Prepare the journal entries to correct the books at December 31, 2014. The books for 2014 have not been closed.
Ignore income tax.
(b) Beginning with reported net income, prepare a schedule showing the calculation of corrected net income for the years ended December 31, 2014 and 2013, assuming that any adjustments are to be reported on comparative statements for the two years. Ignore income tax. (Do not prepare financial statements.)
(c) Prepare a schedule showing the calculation of corrected retained earnings at January 1, 2014.
(AICPA adapted)

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KESTERMAN CORPORATION Statement of Financial Position as at December 31, 2014 and 2013 2014 2013 Current assets Accounts receivable Allowance for doubtful accounts Fair value-net income investments Inventory $163,000 392,000 (37,000) 78,000 207,000 82,000 296,000 (18,000) 78,000 202,000 Total current assets 803,000 640,000 Plant assets Property, plant, and equipment Accumulated depreciation Plant assets (net) 167,000 (121,600) 45,400 $848,400 169,500 (106,400) 63,100 $703,100 Total assets Liabilities and Shareholders' Equity Liabilities Accounts payable $121,400 $196,100 Shareholders' equity Common shares, no par value 50,000 authorized, 20,000 issued and outstanding Retained earnings Total shareholders' equity Total liabilities and shareholders equity 260,000 467,000 727,000 $848,400 260,000 247,000 507,000 $703,100 KESTERMAN CORPORATION Statement of Income for the Years Ended December 31, 2014 and 2013 2014 Sales Cost of sales Gross profit Operating expenses Administrative expenses $1,000,000 430,000 570,000 210,000 140,000 350,000 $ 220,000 2013 $900,000 395,000 505,000 205,000 105,000 310,000 $195,000 Net income